How to Choose an Agency Pricing Model & Measure Its Efficiency

As a marketing agency owner, you essentially sell your people’s valuable time and skills for profit. That’s why it can go south very quickly if you choose the wrong agency pricing model.

I’m sure you have heard that your pricing strategy affects your positioning, productivity, profitability, and even culture.

And it’s true.

If you get agency pricing right, you’re more likely to set yourself up for financial success and client satisfaction.

If you get it wrong, you’ll create a culture of overworked employees, low returns, back-and-forth with clients, endless revisions, and misunderstandings about billing. Who wants that?!

So, you need to put effort into choosing the right agency pricing model that will suit your team AND your clients.

Now, here comes the good and the bad news.

First, the bad news: every pricing model has pros and cons, so you need to invest time in finding the one that best suits your business.

The good news is that your agency pricing model shouldn’t be set in stone; once it’s established, you can always revisit it to ensure it positively affects profits.

So, if you are trying to change your agency pricing strategy, grab your shot of espresso (I bet you need one!) and sit back comfortably in your ergonomic chair. I’ll guide you through the 4 main (and 5 alternative) agency pricing models. I’ll also:

• Give you detailed descriptions of each.
• Explain the concepts behind them, given their pros and cons.
• Provide examples of agencies that use each of the listed pricing models.

Without further ado, let’s get started.

But first, why should Memtime give you tips on agency pricing strategy?

Ha, good question.

Memtime is a time tracking tool. What authority do we have to discuss agency pricing?

Well, you'd be surprised by how knowledgeable we are on this topic.

Our team knows the challenges of agency pricing because we’ve seen founders being stuck in a never-ending cycle of a poor-fit pricing model eating up their team’s time and resources.

We frequently talk to agency owners who are bogged down by these common challenges:

• They don't understand the actual cost involved in delivering their services.
• They often undercharge because they haven't fully assessed the actual costs of their work.
• They struggle to identify which projects are truly profitable because they don't track time.
• They are overworked due to scope creep, which becomes common without accurate time tracking to set clear project boundaries.

We’ve heard it all. Even our team has had experience working for such agencies.

And it was hard hearing all those stories. But they are just that一stories一that, with the willpower of agency owners, were easily turned into lessons. That’s why when teams reach out to us to try Memtime, we provide them with custom live onboarding sessions and explain how they can get the most out of time tracking data. We even include agency profitability tips that can help grow profit margins from the first week of using Memtime.

Don’t believe me?

You don’t have to. 🤷

Here’s what agency owners and teams had to say about Memtime.

That’s why we at Memtime say: focus on the work that matters, think about your fees, and let Memtime help you break free from the chaos of your pricing structure, knowing you’ll accurately bill your clients.

Now that you are一hopefully一somewhat convinced we know what we are talking about regarding agency pricing models, let's list the most common pricing structures.

Top 4 pricing models for an agency

Check out the following list of 4 most common agency pricing models.

#1 Project-based pricing model

This pricing model is the most common, as it tailors rates to each client based on the specific requirements of their project. You set a custom price for a project based on the project scope, and that price is agreed upon before the work begins.

When done right, this pricing strategy can lead to big, successful projects (with outstanding profit margins).

But to ensure you have a deal, you need to persuade prospective clients to choose your custom solutions over existing products they can just “tweak and be done with”. Need an example? Think of a website redesign. You need to be able to convince clients that choosing your team to do a redesign will provide more value than going with a ready-to-use template.

If you are looking to switch to this model, consider the following:

• Do your potential clients have the budget that aligns with their requirements AND your timeline for delivery?
• What are you trying to gain by considering this model? Are you trying to optimize your workflow or increase profit? Perhaps both?
• Do you have the resources needed to cover such projects?

If the answers to all these questions are clear and positive, choose this pricing model. But be very careful about your limitations; you need to be able to deliver specific technologies and skills for this pricing model to work to prove your agency’s value. If you don’t, it will affect your reputation.

Here are the pros and cons of using this pricing model.

✅ Pros:

• Clients know the project cost upfront, which allows them to adjust and allocate their budget accordingly.
• You’ll be able to anticipate payments more easily, allowing you to manage cash flow better.
• This model is ideal for one-time and clearly scoped projects (like website redesigns or ad campaigns) because it’s easy to measure deliverables and match investment to output​.
• Since your agency is paid a set fee for a project, your team will have a natural incentive to complete tasks efficiently and on time, ultimately increasing your business profitability.

⛔ Cons:

• If there happen to be any changes to the project scope, you’ll need to renegotiate the contract and deal with more paperwork.
• Your agency will have to deal with extra costs if you don’t deliver the project on time.
• Estimating the time and resources for a project can be tricky; if you underestimate, you can lose money by spending more time on a project than expected without additional compensation.
• If your team rushes to complete the project to keep within the client's budget, they can potentially compromise quality.
• You face the risk of underpricing your work, charging far less than the service is worth.

🧑‍💻 A company that uses this pricing model is 310 Creative, a B2B demand gen agency. They specialize in SEO, content marketing, and paid advertising and typically charge project-based fees ranging from $5,000 to $10,000 monthly, depending on the scope of the campaign. They also adapt their pricing to fit different client needs, offering custom project pricing.

#2 Revenue-sharing pricing model

The revenue-sharing pricing model involves your client sharing the revenue generated from the project your agency built, with your agency. It’s a model that requires significant trust and promotes long-term partnerships.

Seems a bit odd? Understandable.

But for your clients, engaging in a revenue-sharing model is a strategic investment. They see it as your agency’s incentive to reach their goals. Because of that, oftentimes such a collaboration leads to more innovative ideas, as agencies are more motivated to deliver results. Basically, clients see this agency pricing model as a way to ensure your company is fully invested in achieving their objectives.

Here’s how this model works:

• First, your agency and the client agree on a revenue-sharing arrangement. You create a document that specifies what percentage of the revenue or profit generated from the project will be shared with your agency.
• The project's results should directly contribute to generating revenue for the client. Both you and the client track the revenue generated as a result of the project based on timely reports.
• In the end, depending on the agreed-upon percentage, the client pays your agency a portion of the revenue (most commonly 5-10%).

✅ Pros:

• There’s a feeling of alignment that your client and team are equally invested in the project and are giving their best.
• Clients have lower upfront costs, meaning they won’t be as stressed about budget and its allocation.
• Both you and your client are aware of the financial risk and consequences, which allows you to form an allyship where you work as a team that focuses on long-term goals rather than short-term deliverables.
• Your team will be more motivated to deliver high-quality work and creative solutions since your earnings are directly tied to the project's success.

⛔ Cons:

• Your agency's earnings depend solely on the project's success, making it hard for you to manage cash flow.
• You and your client can have difficulties tracking and reporting revenue.
• You need to make the revenue sharing agreement as clear as possible to avoid misunderstandings about calculating revenue and other KPIs.
• Depending on how project revenue is calculated, payments to your agency might be delayed.

🧑‍💻 An agency that operates on a revenue-sharing model is Growth Marketing Pro. They help businesses grow through marketing strategies and are compensated based on the results their clients achieve.

#3 Retainer-based pricing model

A retainer-based pricing model is one of the best ways to ensure your agency has a steady revenue. When you set a retainer-based pricing for each client, clients pay a recurring fee to retain your services. So, you usually get (monthly) payments for your services.

But there’s a catch with retainer-based pricing.

If you justify retainer prices by reporting on hours worked, clients might scrutinize every hour. Alternatively, if you base the retainer on deliverables, you risk overloading your team if too many deliverables are promised, potentially leading to stress and burnout.

Here are 5 rules you need to follow to establish an effective retainer-based pricing model:

1. Develop a clear scope of services the retainer covers and communicate it to your clients.
2. Define the terms of the retainer agreement and outline the terms of payment, including the frequency and amount of the retainer fee.
3. Communicate what clients can expect in terms of deliverables, response times, and your team’s availability.
4. Review the retainer arrangement and make changes to adjust according to the client’s needs or work scope.
5. Provide clients with regular reports about the work handled under the retainer (so you can justify the fee or go above it).

And here are the advantages and disadvantages of this pricing model.

✅ Pros:

• Your agency will have a consistent revenue stream, contributing to its financial stability.
• You’ll develop long-term relationships with clients and deeper partnerships.
• You won’t have as much admin work, as your billing process will be simplified with fixed payments.
• You’ll have time to adjust work priorities and manage client requests better without constantly renegotiating.

⛔ Cons:

• If you don’t set clear boundaries regarding work scope, clients might expect more work than originally agreed upon.
• You can overcommit or overdeliver to meet client expectations, which can impact the quality of your team’s work.
• Adjusting retainer fees or scope can be challenging, especially if clients want to make significant changes which can lead to potential renegotiations.

🧑‍💻 Neil Patel Digital is a well-known marketing agency that offers digital marketing services on a retainer fee model. They often work with clients on a retainer basis, providing ongoing support and strategy development for a fixed monthly fee.

#4 Hourly rate pricing model

An hourly rate pricing model means that your agency charges clients based on the number of hours your team dedicates to clients’ projects.

This type of agency pricing model is very transparent and straightforward: clients pay for the amount of work done, based on the number of hours. It’s one of the most commonly used and known pricing models, as it’s so easy to understand and execute.

Here’s what you should take into account as a base for your hourly rates:

And here are the pros and cons of using this pricing model.

✅ Pros:

• Clients know exactly how much time your team spends on specific tasks, which allows them to track where their budget is going.
• There’s no need to renegotiate a fixed price constantly.
• Your agency will be compensated for the work put into the project, as long as all billable hours are tracked.
• For even the smallest tasks, hourly billing can be straightforward and cost-effective.

⛔ Cons:

• Clients can’t predict the total project cost, especially if the project takes longer than expected, which can lead to budget overruns.
• This pricing model encourages your agency to focus on billable hours rather than value of the project.
• If your team completes tasks quickly (due to their expertise), you’ll end up earning less than you would with a, let’s say, project-based model.

🧑‍💻 An example of a marketing agency that operates on an hourly rate pricing model is O8. O8 offers different digital marketing services, including UX design, SEO, and branding, with hourly rates varying between $80 and $200.

5 alternative agency pricing models worth considering

The four aforementioned pricing models are the most common. However, the world of pricing models is constantly changing, and you can choose many other options for your pricing strategy.

Here are 5 alternatives you potentially haven’t considered or have forgotten:

1. Value-based pricing. With this type of pricing, you charge clients based on the perceived value or impact of your agency's work instead of the actual time or resources used. The challenging part of this pricing model is quantifying the value of creative work.
2. Input-based pricing. With this model, you charge clients for the resources your agency puts into their projects (staff, software, etc.). This model is not tied to time spent but rather to the scope and effort required for the project.
3. Output-based pricing. With this pricing, your agency charges clients for specific deliverables, like ads, illustrations, or website pages. The downside of this pricing model is that if the project scope expands, your team might have to do extra work for no additional pay.
4. Success fees. Success fees are additional charges your agency can earn when (or if) your clients achieve specific goals or outcomes. The downside of this model is pretty self-explanatory: since fees are tied to specific outcomes, your agency might not receive additional compensation if those targets are not met.
5. Mixed rates. As the name suggests, mixed rates combine concepts of different agency pricing models, like charging a fixed price for a project but including hourly rates for additional work that’s completed outside the scope. The downside of this pricing model is that clients may find it challenging to understand when each rate applies, leading to confusion and potential conflicts.

Which agency pricing model is suitable for your business?

Now that you know the benefits and drawbacks of each agency pricing model, all that is left is to decide which one seems the most logical solution for your business and services.

To that, I say take into account your company, industry, goals, and clients, and think about how you need to track and report with each pricing model.

And if you feel stuck when deciding on the right pricing model, I suggest you follow the CAP acronym. Here’s how it works:

• C ー Clients. Think of your clients in terms of pricing models一which models they will feel the most comfortable with.
• A ー Achievement. Think of the value of what you want to charge for: man-hours, completed projects, deliverables, etc.
• P ーProfitability. Think of what is best for your company’s profitability. Don’t fear you’ll choose the wrong pricing model; if you choose the one that doesn’t yield the expected results, you can always reevaluate and change it.

In the end, I want to remind you not to wing it, make it cha-ching it. You have the knowledge, experience, and tools to choose the right pricing model for your agency and turn your cents into dollars. Good luck!